The future of energy regulation: more efficient, lower cost, better outcomes

Executive Summary

The Government’s number one priority is economic growth, and it has made clear that cutting unnecessary and burdensome red tape is key to achieving this goal. It has set a target to reduce the administrative costs of regulation by 25%, and there has been a well-publicised debate about the role of many regulators in either supporting or restricting growth – Ofwat is to be abolished, and the Chair of the Competition and Markets Authority (CMA) has been removed.[1] At the end of 2024, letters were sent from Downing Street to regulators instructing them to prioritise growth, and the Chancellor has reiterated this ahead of the 2025 Autumn Budget.

However, there has been little public discussion about the future of Ofgem, despite its key role in the UK regulatory landscape. It is responsible for regulating much of the energy system, an industry which, throughout the value chain, contributes over £250 billion to the economy and supports one in 25 of all jobs in the UK.[2],[3] With a major transition to clean power ahead, it is a crucial moment to consider whether the energy sector is being regulated effectively and efficiently.

It is right that regulators like Ofgem hold industry to high standards and ensure customers’ needs are at the heart of decisions around infrastructure development and markets. But they must also hold themselves to the same standards. There are examples of effective regulation by Ofgem, such as introducing the market stabilisation charge at the height of the energy crisis and, currently, delivering a better grid connections process. However, these are outweighed by unnecessary, onerous interventions, and there is a growing sense – felt within and outside the sector – that, in its current form, Ofgem is unable to provide the regulatory environment that will deliver economic growth through the clean energy transition.

As the Government considers barriers to growth and strives to meet its commitment to reduce the administrative costs of regulation by 25%, the urgent need for intervention at Ofgem can no longer be ignored.[4]

Ofgem’s budget has increased faster than comparable regulators over the last ten years and it is an international outlier. While the energy sector workforce has increased by only 8%, Ofgem’s headcount and costs have respectively risen by 120% and 200% over the same period.[5]^,[6] Ofgem’s energy market administration costs are over seven times higher than the budget of France’s regulator, CRE, despite a very similar remit.[7]
There are over 10,000 pages of energy industry codes, more than four times the length of The Complete Works of Shakespeare, placing a heavy administrative burden on the sector.[8] Complex regulation makes the cost to serve an energy account in the UK double the level in France, leaving British customers paying extra for needless red tape.[9] As the Financial Conduct Authority (FCA) cuts swathes of pages from its Handbook, there is no sign of Ofgem taking the same action.
Ofgem’s regulatory failures have resulted in at least £4.5 billion of extra costs to customers over recent years. Poor regulation of the retail market contributed to the collapse of over 30 suppliers in 2021/2022, resulting in a cost of almost £100 on a bill, anticipatory networks investment left the UK more exposed to volatile fossil fuel prices during the energy crisis.[10]
Regular ‘kneejerk’ interventions increase administrative costs and divert resources away from innovation that would improve customer service. For example, Ofgem is pushing ahead with proposals for mandatory zero/low standing charge tariffs despite evidence from both industry and consumer rights groups that it risks driving higher bills for many households.
Systemic delays to licensing and code modifications (energy market rule changes). Some code modifications have taken five years to reach a decision, directly impacting investment in generation, pushing up costs for customers.

The scale of the issues with Ofgem’s performance warrants a new approach. It is time for transformational change. Meaningful reform to address these problems will require a bold approach from Government. New guidance or a simpler mandate will not be enough.

Ofgem should be broken up into its constituent parts, with consumer-facing regulation taken on by the CMA and delivery of schemes administered by relevant bodies, such as the Low Carbon Contracts Company. This would leave a more focused Ofgem, centred on economic regulation of energy infrastructure, including networks and generation. And it would catalyse the sorely needed reset to more proportionate regulation of the energy retail market.

The Government should radically reduce Ofgem’s duties to focus on current and future consumers, investment and innovation, and clean power. It also needs to set clear direction for energy regulation through a new Strategic Policy Statement (SPS) instructing the delivery of long-term customer value through enabling investment and reducing administrative burden. Once the strategic direction is set, Ofgem should be left to operate independently without regular political intervention.

Ofgem’s skills and capabilities must match the needs of its role, prioritising quality over quantity. Secondments and strategic partnerships with industry should be explored alongside the ability to hire outside of civil service salary bands to attract and retain the best talent.

These changes are crucial to enhancing the investability of the sector, enabling the energy industry to contribute meaningfully to the Government’s growth ambitions, underpinning the long-term sustainability of a competitive sector, and lowering bills for customers. Falling short of the radical reform required to address regulatory failures will risk damaging trust in the sector and derailing public support for the clean power transition.

Introduction

The Government’s primary goal is economic growth and the focus on clean power as a driver is clear. As a result, the pressure on the energy sector to deliver has never been greater. At the same time, the complexity of the energy system has increased substantially in recent years, and the governance of the market has also evolved with the introduction of the Clean Power Mission as well as the creation of the National Energy System Operator (NESO), the National Wealth Fund and Great British Energy.

All parts of the energy system – from generators developing new power sources and storage, and network companies building out grid capacity, to retailers creating innovative solutions for customers to benefit from low-carbon technologies – will play a critical role in delivering the clean power transition. With such a dramatic transformation ahead, alongside a desperate need to cut bills, it is a crucial moment to consider whether the energy sector is being regulated effectively and efficiently.

Ofgem employs nearly 2,300 people and its annual costs are around £260 million, figures that have respectively risen by 120% and 200% over the past ten years.[11] Such a huge increase is difficult to justify when compared to the energy sector’s nominal output growing by 87% and the workforce increasing by just 8% in that time.[12],[13]

,The energy regulator’s growth has far exceeded that of comparable regulators, such as Ofcom, Ofwat and the FCA, whose costs have risen by between 60% and 80% over the last ten years.[14] Further, despite France’s energy regulator, CRE, having a very similar remit to Ofgem’s energy market administration segment, the costs of that part of Ofgem are over seven times higher, and it has almost ten times as many staff.[15]

A large proportion of Ofgem’s costs are paid for through energy bills so it is right and essential to ask whether customers receive good value for money. Especially at a time of high energy costs amidst wider inflationary pressures, this should be front and centre of the regulator’s mind.[16] Unfortunately, the evidence is mixed.

In recent years there have been some standout moments of effective regulation by Ofgem, for example the introduction of the market stabilisation charge to protect suppliers during the energy crisis, working closely with the National Energy System Operator (NESO) and industry to deliver a better grid connections process, and collaborating with businesses and consumer groups on the development of new regulations for heat networks.

However, the regulator continues to place a heavy administrative burden on the energy sector, with its industry codes over 10,000 pages long, more than four times the length of The Complete Works of Shakespeare.[17] Businesses, consumer groups and other stakeholders consistently raise concerns that engagement with Ofgem can feel bureaucratic and short-termist.

The regulatory burden is often cited by investors as driving up risk premiums across the value chain, from generation and transmission to supply. This has material negative consequences for economic growth, the energy transition and customers’ bills. Indeed, the former CEO of Ofgem’s predecessor, the Office for Electricity Regulation, has called for the Government to consider removing its regulatory powers over the energy retail market.[18]

Energy UK is keen to ensure that a more collaborative relationship is established between industry and regulator, based on mutual trust, transparency and proportionality. This is crucial to enhance sector investability, enabling the energy industry to contribute meaningfully to the Government’s ambition for growth, underpinning the long-term sustainability of a competitive sector, and lowering bills for customers. Rebuilding the relationship is also vital to restore trust in the sector, which, if not addressed, risks derailing public support for the clean power transition.

Overbearing retail regulation

Before the energy crisis, Ofgem presided over the rapid and unsustainable proliferation of suppliers, viewing the number of competitors and switching rates as the only signs of a healthy retail market, ignoring the quality of competition. The subsequent collapse of more than 30 suppliers during 2021 and 2022 cost billpayers £2.6 billion, nearly £100 per customer, with the regulator’s inaction heavily criticised by Citizens Advice, the statutory consumer advocate, and the Public Accounts Committee.[19],[20]

Ofgem rightly bulked up financial resilience requirements in response to the crisis. However, it has also tightened broader regulation of the remaining, higher quality suppliers to such an extent that investment and innovation is profoundly restricted. The increasingly onerous supplier licence conditions have grown by over one-quarter since 2019.[21] In recent years, there have been numerous occasions where the regulator has reacted in a ‘kneejerk’ manner, without taking the time to assess and consider whether there is any evidence of a systemic problem.

In 2025 alone there have been several investigations that have been disproportionate in relation to the evidence available, often triggered by political or media interest. Examples include backbilling, despite the regulator acknowledging there is limited evidence that it is a systemic problem and that there has not been an increase in complaints; closed account credit balances, even though suppliers successfully return almost all balances and put any unreturned money towards hardship funds; and non-domestic verbal contracting, regardless of only being used very infrequently and primarily at a customer’s request.[22]

Investigations like these cause unnecessary and burdensome work for energy suppliers, creating a high regulation, high-cost environment, which increases bills for customers. Indeed, due to complex regulation, the cost to serve an account in the UK is around double the level in France.[23] These regulatory activities also divert resources away from analysis and innovation that would improve customer service.

Ofgem has also put forward numerous suboptimal proposals without presenting any accompanying evidence to suggest they will improve consumer outcomes. These include mandatory zero/low standing charge tariffs, a boon for second home owners; Radio Teleswitch Service (RTS) licence conditions, which would only apply after the service phase out has already begun; and repeated attempts to mandate priority access to supplier phone lines for an unlimited number of consumer groups, despite the impact this would have on the majority of customers contacting their supplier directly.

While focusing on unhelpful proposals that increase bureaucracy for industry and arguably do nothing for consumers, its restrictions and lack of action on rapidly growing, and predictable, debt has contributed to an unfolding crisis. Household energy debt has more than doubled since the start of 2023 to £4.4 billion, and small and medium business debt stands at as much as £1.8 billion.[24], [25] This worsens outcomes for all energy customers by causing higher bills. Debt related costs in energy bills have increased considerably as the crisis has worsened, with the typical household now paying around £70 per year.[26]

Where companies are keen to innovate and enter markets regulated by Ofgem, businesses often find that they are engaging with an organisation that seems unwilling to provide them with a clear operational framework. New entrants that seek to understand the legal situation relating to topics such as licence exemptions, interpretations of licence conditions, and environmental reporting requirements, are told by Ofgem to seek their own legal advice. A regulator that is unwilling to explain its own rules inevitably dampens innovation and competition, holding back investment and growth.

These varied issues seem to arise so frequently because, lacking strategic direction or a clear remit from Government, Ofgem often appears to respond to expectations that it should be a ‘consumer watchdog’, arguably without fully acknowledging or prioritising its role as an economic regulator. All too often, announcements from Ofgem present a narrative of supporting customers by clamping down on suppliers, which can appear more focused on building its public profile than producing optimal results for consumers and only serves to damage trust in the sector.[27]

Successive Governments share some responsibility for this, as many of the regulator’s lower quality interventions, such as mandatory zero/low standing charge tariffs, have occurred in part due to political pressure for simple, short-term wins.

Delaying investment in networks and renewables

Ofgem’s record is also patchy in other parts of the energy market. Its failure to sufficiently consider value for future consumers materially restricted network development for many years. Until recently, Ofgem did not allow anticipatory investment in networks, with its price control frameworks instead heavily incentivising network companies to focus on cost cutting, as highlighted by Citizens Advice.[28]

Ofgem overlooked the financial benefits that greater network capacity would deliver, such as lower constraint costs and improved access to renewable power, which would have reduced exposure to volatile fossil fuel prices during the energy crisis. Wider economic benefits, including enabling new businesses to connect to the grid, allowing more homes to be built, and facilitating the transition to low-carbon heat and transport technologies, were also not adequately considered.

The lack of investment in critical infrastructure contributed to the UK being underprepared for the energy crisis, which cost the Treasury around £100 billion in support for homes and businesses.[29] Despite the Electricity System Operator’s (NESO’s predecessor) ten-year statements outlining from the early 2010s the need for an increase in transmission capacity for key boundaries, the lack of anticipatory investment in network infrastructure cost billpayers at least £2 billion during the crisis.[30] The short-sighted approach has also been a significant contributor to the enormous growth in the network connections queue, which currently stands at more than 750GW.[31]

To its credit, over the last 12 months, Ofgem has recognised the scale of this issue, introducing positive changes to accelerate the connections queue and allow anticipatory network investment. But this follows years of industry concerns and widespread issues, as evidenced by the scale of the queue and the significant challenges seen in the Open Networks project, with consistent requests from industry for a more transparent process with greater leadership and direction from Ofgem. The problem could, and should, have been acted on sooner.

Work to date has focused on the transmission queue, aiming to reduce the 14-year wait times and accelerate the transition to clean power. However, problems remain across the rest of the network, with five-year timelines for larger demand connections and inconsistent processes, costs, and outcomes across the UK. The continued unpredictability over how these issues will be resolved, including uncertainty about how spatial planning and locational signals could impact projects, raises the cost of capital for developers.

The now urgent need for rapid network investment means charges are expected to increase sharply at the start of the RIIO-3 period, rising by around 15% in April 2026 alone, equivalent to 3% of a typical household’s total energy bill.[32] In addition to driving a marked near-term increase in customer bills, Ofgem has failed to consider the impact of its decision on energy suppliers’ finances. As the charges allowed by Ofgem are far higher than NESO’s initial forecasts (used by suppliers to estimate costs), they face the prospect of not being able to recover their costs from fixed tariffs and contracts, leading to substantial cashflow and profitability challenges.[33]

Electricity generators have also suffered from Ofgem’s lack of attention to the non-retail segments of the energy market. Slow responses to queries, systemic delays to licenses and code modifications (changes to the rules governing the energy market), and a lack of skilled personnel to deal with issues has regularly caused problems and delayed investment decisions.

Code modifications, for which Ofgem is the decision maker, have significant impacts on the commercial case for projects. The longer decisions take, the greater the level of financial risk that must be factored into investment plans, such as Contract for Difference (CfD) bids. Regulatory uncertainty can also unnecessarily postpone, or cause the cancellation of, a projects’ Final Investment Decision (FID).

Proposed code modifications, CMP315 and 375 – which could change how the value of the locational element of transmission network charges is calculated – were submitted to Ofgem in February 2024 and, although initially given an indicative decision date of October 2024, are still awaiting decision. This could add around £4/MWh to the costs of an onshore wind generator in North Scotland and reduce costs by approximately £0.5/MWh for southerly generators, so the lack of decision creates significant uncertainty. Another code modification, CMP344 – that could change which system participants pay for offshore transmission costs – has been under consideration by Ofgem for almost five years.

Recommendations

Fortunately, the Government has the perfect opportunity to tackle these issues and futureproof energy regulation, with the Department for Energy Security and Net Zero’s (DESNZ) review of Ofgem, launched at the end of 2024. For the UK energy sector to remain an attractive investment proposition – enabling it to continue supplying reliable energy, contribute to economic growth, and deliver positive customer outcomes with lower bills – the Government must make bold decisions that drive significant regulatory change, as it has with the water sector.

1: The Government should break up Ofgem to create a more focused energy infrastructure regulator and reset retail regulation.

Ofgem should be separated into its distinct parts, with various elements moved to more appropriate organisations:

The CMA should take on consumer protection and competition regulation in energy supply and other customer-facing elements of the market, such as heat networks suppliers, flexibility service providers and third-party intermediaries.
The delivery of schemes should shift to relevant organisations that already administer similar mechanisms, such as the Low Carbon Contracts Company taking over the Renewables Obligation and the Microgeneration Certification Scheme assuming responsibility for the Boiler Upgrade Scheme.
Ofgem should only maintain economic regulation of energy infrastructure, such as networks, generation, and storage and flexibility assets.

This transformative action would provide the required catalyst for the sorely needed reset to more proportionate regulation of the energy retail market. Energy is an essential service, and strong consumer protections are vital. However, they must be paired with flexible and proactive regulation to enable markets to thrive, attract investment and unlock innovation, which in turn has the potential to deliver huge benefits to all customers.

For example, compliance activity should be conducted in a collegiate, not combative manner. The FCA can provide inspiration for the CMA here. The finance regulator’s supervisory role involves ensuring that the market functions effectively and adopting a risk-based approach to compliance, focusing on firms posing the greatest risk to customers rather than pressing all companies for information. In stark contrast to Ofgem, the FCA does not typically publicise investigations and works with affected firms to resolve issues, instead of swiftly moving to enforcement action. The CMA should show evidence of attempting to overcome problems and conduct a proportionality test before imposing fines or penalties.

The restructuring would also create a more focused Ofgem, centred on economic regulation, which can adequately balance current and future consumers in its approach to infrastructure investment and price control decisions. In combination with setting clear boundaries of responsibility between the streamlined Ofgem, the Government and NESO, this will enable more effective regulation of the evolving energy infrastructure landscape.

2: DESNZ needs to provide clear strategic direction on the objectives of energy regulation but refrain from regular interference.

DESNZ should tackle the sprawling set of duties Ofgem currently has, and streamline them to focus on three key areas: current and future consumers, investment and innovation, and clean power. The Government should also stipulate the CMA adopts these principles for energy retail regulation.

Following that, DESNZ should publish an updated energy regulation specific Strategic Policy Statement (SPS) directing the delivery of long-term customer value through the development of a modern, efficient, low-carbon energy system by enabling investment and reducing administrative burden.

To ensure investment is being sufficiently facilitated, any proposed investigations or regulatory interventions should be subject to a test against the three new duties, with those that could have material financial or economic implications being raised at board level. The FCA can also provide the vision for reducing regulatory burden, having shifted to outcomes-focused regulation and now cutting swathes of pages from its Handbook. Effective energy retail market regulation would see the current licence conditions replaced with a short set of prescriptive minimum standards, bolstered by outcomes-based codes of practice designed with industry.

Energy regulators should be mandated to steer clear of policy. Any reviews conducted need to avoid options that require substantial legislative change, and senior leaders should be directed against offering public opinions on Government proposals. Equally, DESNZ must resist the urge to provide tactical direction to regulators, particularly in the energy retail sector. Once the strategic direction is set, the Government needs to allow the CMA and Ofgem to deliver as truly independent regulators. The Government can then put in place powerful mechanisms to hold the regulators accountable for their performance against the strategic objectives set in the SPS.

3: Ofgem’s skills and capabilities should match the needs of its role, prioritising quality over quantity.

DESNZ and Ofgem should explore secondments and strategic partnerships with industry to share knowledge and boost capabilities. The regulator should also be given permission to move away from civil service salary bands so that it can attract and retain the best talent. Further, the Government should consider bringing in senior leaders that have delivered positive cultural and organisational change at other regulators, such as the FCA, or operate much more efficiently, for example France’s CRE.

[1] HM Treasury (2025), New approach to ensure regulators and regulation support growth

[2] ONS (2025), GDP output approach – low-level aggregates – Office for National Statistics, Input-output supply and use tables – Office for National Statistics; Energy UK analysis

[3] ONS (2025), Employment multipliers and effects in the UK – Office for National Statistics, JOBS05: Workforce jobs by region and industry – Office for National Statistics; Energy UK analysis

[4] HM Treasury (2025), New approach to ensure regulators and regulation support growth

[5] Ofgem (2025), Ofgem Annual Report and Accounts 2024-25; Ofgem (2015), Ofgem’s Annual Report and Accounts 2014-15; Energy UK analysis

[6] ONS (2025), JOBS05: Workforce jobs by region and industry – Office for National Statistics; Energy UK analysis

[7] Ofgem (2025), Ofgem Annual Report and Accounts 2024-25; CRE (2025), Activity Report 2024; Energy UK analysis

[8] Ofgem (2025), Energy codes; Folger Shakespeare Library (2025), Frequently asked questions about Shakespeare’s works; Energy UK analysis

[9] UK Parliament (2025), 15 October 2025 – The cost of energy – Oral evidence – Committees

[10] Citizens Advice (2021), Market Meltdown: How regulatory failures landed us with a multi-billion pound bill – Citizens Advice NESO (2023), Thermal Constraint Costs Data 21-22, NESO (2023), Thermal Constraint Costs Data 22-23, NESO (2023), Constraint Breakdown 2021-2022, Constraint Breakdown 2022-2023 Ofgem (2025), Gas Prices: Day Ahead Contracts – Monthly Average (GB); Energy UK analysis

[11] Ofgem (2025), Ofgem Annual Report and Accounts 2024-25; Ofgem (2015), Ofgem’s Annual Report and Accounts 2014-15; Energy UK analysis

[12] ONS (2025), GDP output approach – low-level aggregates – Office for National Statistics; Energy UK analysis